Beijing’s IPO Lid Is Shut Tight

By WSJ Staff

China isn’t likely to open the floodgates for new stock listings anytime soon, despite the recent rally in its stock market.

An impressive 12% gain so far this month means the benchmark Shanghai Composite Index is up 0.9% this year, but it remains one of the world’s worst performers, far behind the 21% surge in the Nikkei Stock Average and the 7.5% rise in the Dow Jones Industrial Average.

The sagging stock market prompted the China Securities Regulatory Commission to halt approvals for initial public offerings on Oct. 10, and it has given no sign that it is considering reversing that.

Chinese auto-parts manufacturer Zhejiang Shibao Co. was the last domestic listing, and it soared sevenfold on its Nov. 2 debut to post the strongest first-day gain for an IPO in more than 10 years, as investors deemed the shares undervalued. Shares have since pulled back somewhat but remain well above the IPO price of 2.58 yuan (41 U.S. cents).

“The regulator may not restart the IPO market until it believes the stock market is turning around,” said Simon Wang, an analyst with Guoyuan Securities.

The CSRC didn’t respond to a request for comment on its IPO rules.

Although China’s economy is showing signs of accelerating growth, Dongxing Securities analyst Sun Zheng said the stock market may fall again. He said he was “skeptical about whether companies’ earnings will improve significantly next year,” in part because of overcapacity in many sectors.

Sentiment toward new shares in China is driven more by whether the offering is considered “hot,” rather than the company’s prospects or underlying economic factors. Many investors see IPOs as speculative investments and sell quickly.

Even this year, despite the market’s sluggishness, IPOs have done well, rising an average of 27% on their debut, compared with a 21% rise in 2011, data from financial data provider CapitalVue showed.

Despite such strong debuts, the IPO market faces an image problem with longer-term investors. Many stocks that have soared on their first day have plunged soon after, often on disappointing earnings. Regulators are expected to soon tighten scrutiny of listing applicants’ financial positions, which will effectively raise the threshold for new share floats.

Meanwhile, the list of market aspirants is building up. More than 800 companies were awaiting regulatory approval for new listings as of Dec. 20, according to official data.

If approved, the number of listed companies in China could swell by around 30%. That surge of supply would likely overwhelm investor demand for shares and drag the market lower, particularly if it is already weak.

Without the option for a domestic stock-market listing to raise cash, Chinese companies—especially smaller private-sector firms—are stuck for funding. Bank loans remain tough to get for smaller firms, as Chinese banks tend to focus on the big state-owned clients. Listings elsewhere, particularly in Hong Kong, remain an option for some companies.

China’s regulator has suggested some alternative funding venues.

In a front page story published Dec. 14, the state-run China Securities Journal reported that the CSRC may try to avert an oversupply of shares by encouraging listing applicants to turn to the off-exchange equity market, bond market, or overseas bourses. Analysts, however, say these aren’t real options.

The bond route also is unlikely to win favor, as companies need to repay debt when the bonds expire, and returns for investors don’t mirror the heady IPO gains of the past.

Although the effective IPO moratorium has been in place for less than three months, the value of IPOs has plunged to less than half of that of a year ago, because of a slowing economy as well as political uncertainties prior to the country’s once-a-decade leadership transition that happened last month.

As for overseas listings, the dwindling appetite for China-linked stocks in the U.S. and other foreign markets following a series of accounting frauds and scandals has made that option tougher. Hong Kong’s appetite for listings from China has also fallen dramatically this year after recent IPOs failed to outperform the broader market.

Analysts say once the market recovers, China will once again approve IPOs. For now, companies have to rely on the other options open to them.

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